Ethiopian Business Review

The Two Musketeers: Huawie, ZTE, their Scramble for Africa

In a recent development, Chinese vendors Huawei and ZTE rolled out a deal valued at USD1.6 billion with the State owned monopoly ethio telecom, deemed as ‘one of the most annoying public enterprises in the country’ by its customers. The telecom has signed vendor finance deals with the suppliers in the last week of July, with Huawei’s share of the deal valued at USD700 million.

The two gigantic Chinese telecom companies make the agreements to expand access to telecom services and add more modern features in to the service, to offer far better telecom services in the country.

Acting CEO of ethio telecom, Andualem Admasse said “the project aims to ensure universal telecom services that sustain the security of the network system in the country.” The project is expected to increase the number of mobile subscribers to 50 million while it enables the telecom corporation to offer state of the art 4G mobile technology services in the capital.

It also enables the national utility to offer 3G mobile services to subscribers all around the country. The hope is the project will increase telecom services coverage of the country to 85 pct. And other than the much hoped for mobile expansion, which is expected to solve repeated network failures, the project includes network and information system services.

Africa’s telecom sector is very lucrative. Mobile subscribers across the continent reached almost 650 million last year from 25 million in 2001, according to the World Bank. The two major Chinese players in this field are equipment manufacturers Huawei Technologies and ZTE (Zhongxing Telecommunications Equipment Corporation). In 2010, they were active in 50 African countries, providing communications services for over 300 million African users, writes Zhang Zhongxiang, a research fellow at the Shanghai Institute for International Studies. According to him, the two Chinese firms have established more than 40 3G telecom networks in more than 30 African countries and built national fiber-optic communications networks and e-government networks for more than twenty African countries.

Huawei, which means ‘China Can’ in Chinese, is the largest telecom equipment manufacturer and network solutions provider in China and the third-largest in the world. State-owned ZTE is the second in China and the fifth largest in the world, according to a research by Lin Sun (PhD), a veteran telecom industry consultant with 25 years of experience, now based in Beijing.

The gold rush towards Africa among these Chinese enterprises is gaining momentum. After more than 5 years of cut-throat competition, Huawei has become the largest telecommunications supplier in the Middle Eastern and North African markets, taking the place of Ericsson, Siemens and other western operators. In South Africa also, Huawei occupies second place, only next to Ericsson. According to telecom lead, in Nigeria, the most liberalized telecommunications market, Huawei and ZTE have monopolized the local market, occupying 90pct of the market. Considering this, Nigeria’s president Goodluck Jonathan met with the chiefs of the two organizations in his recent visit to China. These Chinese enterprises have already overtaken traditional European and American enterprises in the largest markets with the largest populations, such as Nigeria, Egypt, South Africa, and Ethiopia. Many start to believe that the future African telecommunications market will be entirely the domain of these two Chinese companies.

In Africa ZTE employs 1,000 workers, 63pct of whom are Africans and has representatives in nearly 50 African countries. It has a training centre and 15 training bases in Africa, providing training for 4,500 Africans annually according to the official website of the company.

Lin Sun says Africa accounts for about 12 to 13 pct of Huawei’s revenue (about USD 3.5 billion in 2010 from Africa). For ZTE, African sales make up a slightly lower proportion at about 11 pct or USD 1 billion in 2009. Annual sale of mobile phones in the region is about USD 4 to 5 billion a year with an estimated growth rate about 15pct per year.

The key market strategy of the Chinese companies seems to be their competitive pricing, tailor-made for cash-stripped African countries. Huawei’s former head of operations in West Africa, Wilson Yang, quoted in a case study on the company by the University of Pennsylvania Wharton School in 2009, says that Huawei manages to achieve tremendous margins while still pricing itself only 5 to 15 pct lower than its major international competitors, Ericsson and Nokia. ZTE prices 30 to 40pct below European competitors.

Another factor for Huawei’s success in Africa is its superior customer service with unparalleled responsiveness of management and personnel, according to the study.

The recent deal between these enterprises and ethio telecom has once again forced observers to raise questions about the competitive advantage the Chinese vendors hold over their European rivals by having access to cheap capital from China’s banks, capital that is then used to finance large vendor finance deals. This is one of the winning points for these companies in the capital stripped market like Africa. But all this is not passing without questions.

Some Ethiopian experts have expressed scepticism, saying these kinds of projects are short sighted. In an interview with eLearning Africa, Alemayehu Geda (PhD), Professor of Economics at Addis Ababa University warned about the long-run operational costs and lack of genuine technology transfer to Ethiopian experts.

“Ethiopia’s telecom sector depends on China’s technology. China has the monopoly to deliver spare parts and after sales services for years to come.” He stressed the need to upgrade the skills of local workers and officials both in negotiation and technical handling of the industry, following the signing of a massive deal between ethio telecom and ZTE last time around.

Recently these Chinese multinationals: ZTE and Huawei were on a hot seat. The US suspects the two companies for spying in favour of China and advised its companies not to work with the two organizations. This doesn’t seem to be a separate incident though, in India after an investigation led by the India secret services, a head at the Ministry of Telecommunications has declared that the government has set up a laboratory in Bengalore to test the ZTE and Huawei equipment before used in the country ,according to Afrique IT news.

One could think that Washington’s doubts are part of a strategy against the invasion of the Chinese in the American market, but if it is true then Africa would be a pot of gold of information for Beijing and African states would truly be exposed. The two Chinese giants are very active in Africa, as they have contracts with several telecommunications operators. They are also involved in almost all of the technological city projects. Huawei is part of the Konza City (Kenya) and Hope City (Ghana) projects. ZTE is involved in ICT park (Ethiopia), to name a few.

The firms are also privileged partners of African states in the creation of governmental technological systems such as the e-government projects all over the continent. It is an assignment for African states to put the firewall before it is too late.

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